Fact Pattern 1

Mrs. Crocker loves to bake cookies and cakes. She bakes for her children and neighbours whenever she can. One day Mrs. Crocker decides that she is going to start baking as a business. Mrs. Crocker does not have any business expertise or legal training, but that doesn't stop her from following her dream. She goes to her local grocery store and buys all the raw ingredients she needs to start baking.

Initially, Mrs. Crocker sets up a stand on her driveway with a small sign advertising her cookies and cakes for sale. The neighbourhood already loves her cookies and cakes so she sells out immediately. Mrs. Crocker realizes that she is going to need to make a lot more product if she is going to keep up with demand. She contacts a local food supplier and tries to buy all her raw ingredients directly from them, rather than from the grocery store. The food supplier tells her that they do not sell baking products by the pound, rather they sell it by the ton. Mrs. Crocker does not have enough money to buy baking supplies by the ton, so she goes to her local bank to see what they can do for her. Mrs. Crocker's banker is able to get her a Visa that is unsecured and another loan secured against her house. With the new credit Mrs. Crocker has received she is able to buy her raw materials by the ton and ramps up her production.

Mrs. Crocker keeps selling her cookies and cakes from her driveway. The neighbourhood cannot get enough of them. People start driving from all over the city to Mrs. Crocker's home to buy her cookies and cakes. One of her new customers is Warren. Warren buys cookies and cakes every Sunday from Mrs. Crocker. However, Warren has noticed that the quality of her products are starting to slip. One of the cakes Warren bought from Mrs. Crocker was raw on the inside and Warren had to bake it himself when he got home. Warren approaches Mrs. Crocker about the lack of quality in the cake. Mrs. Crocker apologizes and says that she is overwhelmed with her business. She knows how to bake good cookies and cakes but she doesn't know how to operate a business and is struggling to keep up with orders and keep up with her quality. Warren offers to invest in her business and thinks they will make a perfect partnership as Mrs. Crocker can take care of all the baking and Warren can take care of the operations of the business.

Warren comes up with a business proposal for Mrs. Crocker. Warren will invest $100,000 into the business for 50% ownership. This $100,000 will be used to lease out a commercial space and hire employees. Mrs. Crocker will still be responsible for purchasing the raw materials. With their new location and employees Mrs. Crocker will be able to dramatically increase their production. Warren then wants to open up 5 more stores within the next 6 months. After that he wants to take the baking store nationwide. He wants to have a Mrs. Crocker bakery on every street corner across the country.

1. Mrs. Crocker approaches you as her lawyer and says she needs to set up a business in order to carry out Warren's plan. Based on the information contained in the fact pattern above, identify the pros and cons to each other following business structures and how they apply to Mrs. Crocker. (10 marks)

Sole Proprietorship

Partnership

Limited Partnership

Corporation

1. Which business structure would you recommend to Mrs. Crocker and why? (5 marks)
2. Mrs. Crocker asks you what are the legal implications of accepting Warrens offer and what are the legal implications if she does not accept. What do you tell Mrs. Crocker? (10 marks)
3. 6 months go by and Mrs. Crocker business is not doing well. She is behind on all her bills as well as the loans she took out from the bank. She asks you what her creditors could do to her and what options she has available to her. What do you tell her? (10 marks)